Do you own a family business? Do you want to be able to sell it to a third party within the next few years? Are there any employees who you wouldn't hire or retain if they weren't family members?

If you answered "yes" to these questions you aren't alone. However, many people reason that if they are going to sell, anyway, why not leave the under-performing family member in place until the business is sold? That way it won't create family relationship problems and the buyer can decide whether they will retain the person or not. While this passive strategy is probably the easiest, it might not be a good idea.

If this family member is a non-performer, for every dollar paid to him for which he isn't producing a return, it will reduce value by multiples of that dollar. The nephew who spends more time golfing and playing computer games than doing sales and marketing, but who is paid $75,000? That may result in a sales price that's a few hundred thousand dollars lower than you might achieve if you terminate him a couple of years in advance of a sale.

Such an employee also may be an impediment to a sale. A buyer is going to carefully evaluate staff. If they are unimpressed with your nephew that will reflect poorly on the business, and will also add to the buyer's list of things they need to fix (i.e. need to hire a new marketing and sales guy).

OK, so let's say you know you should terminate the nephew, but how do you do so without creating a problem in the family? The Wall Street Journal has an article with tips on how to do this: How Do You Fire a Family Member?

After a qualified business buyer signs a confidentiality agreement for a business represented by Codiligent business brokers, the buyer will receive a comprehensive 60-150 page confidential information package. The purpose of this is to provide the material disclosures about a business that a typical buyer would want to understand in order to make an informed acquisition decision. We believe this is the right way to generate serious interest from business buyers and encourage them to submit offers that will survive due diligence with little or no re-negotiation.

You would think this type of confidential package would be the norm for business brokers, but you may be surprised to learn that the average information package we see from other brokers contains little more than 1-5 pages of qualitative information along with financials. Then when follow-up questions are asked, it's common for business brokers who use a less comprehensive information package to immediately schedule a meeting between the buyer and seller, rather than answer the questions. The result is often wasted time for both the buyer and seller as they quickly discover that the business is a mis-match with the buyer's acquisition criteria.

Business sellers may prefer to not devote time up front to compiling comprehensive information, but putting in the effort to develop quality and comprehensive information packages will save a business owner significant time during the business sale process by avoiding inappropriate meetings, limiting follow-up questions, and avoiding deal termination due to a buyer discovering facts about the business that should have been disclosed earlier in the process. More complete information gives buyers more confidence in the business, lowers uncertainty, and increases the probability of a deal successfully being completed.

The document that a business buyer submits to a seller to signify interest in acquiring a business is usually a Letter of Intent (LOI). A LOI is a non-binding expression of interest and seeks to gain a general understanding between a business buyer and seller on the primary deal terms. While non-binding, the LOI is, in essence, the offer. The thoroughness of LOIs vary greatly. Some buyers and business brokers use a basic LOI that is limited to saying something like “This letter is a non-binding expression of interest for John Doe to acquire ABC, Inc. John Doe wishes to conduct due diligence, and if there are no adverse findings, then he will formalize his interest in a binding purchase agreement.” I strongly advise seller clients against agreeing to such a simple, vague LOI.

I recommend that as many of the anticipated deal terms as possible be outlined in a LOI. Without covering terms in more detail there is a significant risk that the parties may develop substantially different expectations, leading to the deal breaking down and terminating after due diligence is completed and binding purchase agreement negotiations begin.

Some of the deal terms that I usually suggest be included in a LOI include:

amount of cash paid at closing

amount and terms of any seller carried financing

amount and any contingencies related to external financing

the terms and amount of any anticipated earn-out

whether the transaction will be structured as a stock sale or an asset sale

a description of any assets that will be excluded from the sale

whether current assets will be the property of the seller or the buyer

whether current and long term-liabilities will become obligations of the buyer or whether the business will be transfered unencumbered by any current or long-term liabilities

the time commitment, nature, and any compensation related to a training and transition period

any on-going future support that the seller will provide

the general terms of any seller employment contract

the general terms of any non-compete agreement anticipated

financing contingencies

due diligence deadline

the date by which a binding purchase agreement must be drafted

the date by which a binding purchase agreement must be executed

the closing date

This list isn't comprehensive and can vary from one transaction to another, but the primary take-away should be that more detail on significant deal terms and the business sale process will help prevent misunderstandings and get a business sale transaction to the finish line.